Apartment building investing is an advanced real estate strategy that can feel like a full-time job. You’ll have many responsibilities, but you can also make significant cash flow from the tenants. Having an apartment building with many units reduces the impact of a vacancy, and you’ll have more income potential. Most investors buy and hold several single-family rental properties before investing in apartment buildings.
Apartment buildings are the next logical step for rental property investors who want to scale their income. We will discuss how the process works and some options for apartment building investing.
How Does Investing in an Apartment Building Typically Work?
Apartment building investors create investment criteria and find apartments that fit the parameters. Investors then assemble enough funds for a down payment, do their due diligence, and make an offer. You can use similar apartment buildings and net operating income to assess a property’s fair value. Some investors prefer to build an apartment on a promising piece of land.
Are Apartment Buildings a Good Investment?
Every investment has some risks. Apartment buildings have a steeper barrier to entry, and they can get troublesome if you can’t fill units. However, most tenants will stay in the apartment for several years since people always need a place to live. Since apartment buildings have many units, a single vacancy won’t put you in a troubling situation. A single vacancy in a duplex would significantly impact a duplex’s rental income.
Benefits Of Apartment Building Investing
Investors with the resources and partnerships to enter apartment investing get several perks. These benefits will help you grow your income and protect your wealth.
Generate Passive Income and Cash Flow
You will receive monthly rental income from each occupied unit. Apartment building investors can hire a property management company to keep the property in great condition and address any issues. Apartment buildings give you a way to earn consistent income without working long hours.
Tax Benefits
Real estate is a tax-friendly asset that can protect your bottom line. Investors can write off depreciation from their tax bills. You’ll get these same advantages for any real estate, but apartment buildings have higher depreciation due to their square footage and other factors. Taxes can silently deplete your profits if you are not careful, especially if you invest in assets you can’t use as write-offs.
Scalable Property Management
Single-family rental homes are a great way to get started in real estate. However, these properties become more challenging to manage as you acquire more of them. You’ll have to drive to various locations to address each unit’s issues. Apartment complexes have many units located on the same premises, saving you time and money with property management. A property manager can address your portfolio’s issues in one place instead of driving to many single-family rental homes.
Asset Appreciation
Real estate appreciates over time as more people move to a location. The limited supply of land and growing population prop real estate as a hedge against inflation. Apartment building investors have an additional way to appreciate an asset that you can’t get as a homeowner. Some people look at an apartment’s net operating income to determine the asset’s fair value. You can force asset appreciation by increasing rent and setting up several income streams. You can collect money on parking fees, laundry machines, vending machines, and other resources.
Portfolio Growth
It can take years to find and buy 50 single-family homes, even if you already have enough capital to make those purchases. You can build your real estate portfolio much faster by acquiring a 50-unit apartment building. You can build your portfolio just as much with this purchase compared to finding, buying, and negotiating the buying prices for 50 single-family homes. Apartment buildings offer rapid portfolio growth if you have enough capital to acquire these assets.
What Are Your Options for Apartment Building Investing?
Real estate investors can get into apartment buildings through various strategies. Some of them are more lucrative than others, with varying levels of financial commitment.
Do It Yourself
Buying an apartment building on your own is the most difficult way to enter this industry. You will have to do your due diligence alone and gather enough funds for a down payment. Some apartment complexes will require a down payment greater than $1 million to get started. You will also have to keep up with mortgage payments. You have the most control if you do it yourself, but you’ll need deep pockets to pursue this path.
Get A Partner
Working with a partner still gives you plenty of control over the asset, but you split the costs in half. You’ll only need to raise $500,000 for a $1 million down payment. Some real estate investors work with multiple partners to buy an apartment complex. You’ll have to split rental income with each partner. Keep that in mind so you don’t end up with a team too large for your liking.
Invest with a Multifamily Real Estate Company
Apartment buildings require a lot of time. You’ll have to manage the property yourself or hire a property manager. Investors should also know several contractors to address issues within the property. It can get stressful to manage an apartment building. Some investors prefer working with a multifamily real estate company. These investors pool their money with other investors, and the multifamily real estate company handles everything else. The company’s professional management team finds excellent deals, maintains properties, and maximizes cash flow.
Buy Real Estate Investment Trusts (REITs)
Real estate investment trusts give you exposure to many real estate properties. These trusts buy properties and distribute at least 90% of the cash flow to investors. You can buy these assets on stock exchanges and collect dividend payments. You can receive cash or reinvest the dividend. REITs are liquid assets that make it easy to invest in various real estate asset classes without putting down much capital. Many REITs cost less than $100 per share and can appreciate.
Invest Through a Syndication Company
Real estate syndication companies raise funds from a group of investors. A sponsor uses the investors’ funds to buy real estate properties. You can join a syndication company that invests in multifamily properties. Make sure the syndication has objectives that align with your investing goals and risk tolerance.
Invest Through a Real Estate Fund
A real estate fund is a pool of investors’ capital, similar to the other choices we have already discussed. However, investors put money into the fund, not knowing what property the fund manager will purchase. You should review the real estate fund’s past performance, objectives, and the manager’s experience before investing in a fund.
Apartment investing offers a wonderful opportunity to real estate investors looking to scale their portfolios. Investing in apartments can minimize your risk by reducing property management fees and providing more units. A vacancy will make less of a dent in your rental income. You can get started alone or join forces with like-minded investors who want to see you succeed.
